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With a provincial election now just eight months away, tax policy is certain to play a key role in campaign discourse. The Liberals will tout their major cuts to personal and corporate income taxes that have made British Columbia a relatively low-taxed province, helping to insulate the economy from the turbulence afflicting many other jurisdictions in the nation and abroad.

The New Democrats will remind voters about the HST and how the incumbent government introduced the tax with scant notice before the last election. The Liberals will caution voters that an NDP government would raise taxes to meet its ambitious spending priorities. While the NDP may be reluctant to provide great detail about its tax plans, the party will ultimately be forced to reveal some substance to avoid possible later charges that it also had not given adequate notice.

A natural temptation for the NDP will be to focus on taxes that most voters do not feel impact them — such as higher income taxes on top earners and corporations. This follows the witty dictum of a chairman of the tax-writing U.S. Senate Finance Committee: “Don’t tax you, don’t tax me; tax that fellow behind the tree!”

While perhaps politically astute, hikes in income taxes are not well advised from the standpoint of the best economic evidence. Much better revenue-raising solutions are available for B.C. under either a new government or the incumbent one. My column today provides the diagnosis; tomorrow’s column writes the prescription.

Raising B.C.’s tax rates on the incomes of high earners and corporations will not produce the additional revenues that might be naively forecast. Empirical studies confirm the high responsiveness of these revenue bases — reported taxable incomes of high earners and corporations — to increased tax rates imposed at the provincial level.

Some common tax avoidance manoeuvres for business are borrowing and lending among corporate affiliates, changing compensation methods, and transfer pricing. Businesses can also shift their tangible investment and operations outside the province, choose not to expand in the province, or choose not to locate here in the first place.

Increasing corporate tax rates will lose revenues from the reduced tax base as well as from the reduced income and sales taxes on the dampened business investment, operation, and employment. Raising corporate tax rates is estimated to be the most costly revenue source for B.C. in terms of reduced efficiency and growth.

Raising corporate income taxes would also be problematic because dismantling of the HST next year will impose a $1.9 billion burden on business. Even though much of those costs will flow through as higher prices for BC consumers, businesses will face disincentives to invest and the provincial economy will suffer accordingly.

Similarly, raising tax rates on the incomes of upper earners is compromised by their high responsiveness. They can react by incorporating their business and thus shielding income from the personal tax or by shifting to out-of-province trusts or to other family members. Legal tax avoidance devices for sheltering financial incomes are myriad and highly responsive to provincial tax rates. As an ultimate response, upper earners can depart the province along with all of their income taxes and their job creation.

Following its recent budget, Ontario’s minority Liberal government was pressed by the NDP to introduce a surtax on incomes of individuals with taxable incomes above $500,000 — who already pay a disproportionate share of all income taxes. This change pushes their marginal tax rate to a shade below the 50-per-cent mark. One analyst has estimated that this surtax will actually reduce Ontario revenues in the long run because of the many ways that very high earners can adjust their behaviour.

These tax-the-rich and tax-the-corporation nostrums will fail to produce the promised revenues and damage the provincial economy. Moreover, they seek to squeeze more revenue from tax-compliant entities while ignoring the potential for collecting from entities that are shirking their taxes through either legal avoidance or outright evasion.

Medical Services Plan premiums are a large revenue source, topping $2 billion annually and forecast to exceed corporate tax revenues next year. While the premiums are regressive head taxes and therefore a tempting target for NDP tax policy, replacing those revenues as well as garnering additional sums would be a tall order.

Moreover, the premiums are one way of tapping the pockets of non-compliant taxpayers and the growing ranks of seniors enjoying consumption levels significantly higher than their taxable incomes.

My diagnosis of B.C. tax policies concludes with the property transfer tax on homes and the transfer tax on private sales of used vehicles. These taxes discourage efficient exchanges among individuals, inhibit worker mobility, and bear relatively heavily on those at lower incomes; both levies warrant reform or abolition.

In tomorrow’s column I offer ideas on tax policies that will raise revenues from both non-compliant taxpayers and relatively under-taxed sources.

J. Rhys Kesselman is Canada Research Chair in Public Finance and a professor with the School of Public Policy, Simon Fraser University.Tomorrow: Prescriptions for B.C.

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